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Trustees and the Bankruptcy System

If you find yourself in the position of having to file for either Chapter 7 or Chapter 13 bankruptcy protection, your paperwork will eventually come under the purview of a trustee. Appointed trustees have specific administrative duties which must be performed in a professional and unbiased fashion.

Chapter 7 trustees will initially review the paperwork you have submitted. Chapter 7 bankruptcy petitions include a list of your debts, your income, and property owned. You will usually also be asked to submit such things as tax returns, pay stubs, etc. The trustee must review your submissions, verify same, and independently calculate submitted figures.

After such a review (approximately 30 days after submission) the trustee will conduct a 341(a) meeting. The trustee and any creditors who so desire will ask you questions under oath about the paperwork/figures you have submitted. As an aside, you should know that it is not commonplace for creditors to actually attend these hearings.

The biggest role of the Chapter 7 trustee involves determining the value of any non-exempt assets you possess and selling those assets which are not exempt under petition rules. The trustee must liquidate these assets in a way that will be most advantageous to the creditor. Such sales are used as payments to your creditors. If no such assets exist, the trustee must prepare a report explaining that there will be no “distributions” made to any creditors.

Chapter 7 trustees also have the ability to review any transfers the petitioner may have made prior to filing for protection. For example, if the petitioner transferred his ownership of an asset to someone else or if he chose to pay back a family member instead of another creditor, the trustee has the power to void such transfers and paybacks and divide/redistribute these assets to all your creditors. The trustee can also check to make sure that all creditors have secured appropriate legal liens against you; if such is not the case, said property can be sold free and clear of any encumbrances by the trustee.

Chapter 13 trustees have more in-depth performance duties primarily due to the fact that most Chapter 13 bankruptcies take several YEARS to discharge. As with Chapter 7 filings, the petitioner must file paperwork which indicates income, assets, debts, and monthly expenses. A Chapter 13 filing must also include a proposed plan for repaying your debts. Tax returns and pay stubs may also be required. The assigned Chapter 13 trustee will review all submitted paperwork for accuracy, entirety, reasonableness, etc. This review process will also include making sure that creditors have provided appropriate proofs of claim (filed within 90 days) with regard to your debt, which is similar to Chapter 7 provisions. The trustee is then tasked with making sure that the maximum amount of money possible is recouped by creditors. With this in mind, be advised that a trustee may question your repayment plan with an eye toward enlarging it. If there is no agreement between the creditor and the trustee, a judge will be the final arbiter of what your payment plan will look like.

Approximately 30 days after your paperwork is filed you will be questioned under oath regarding the information you have provided. Unlike Chapter 7 filings, Chapter 13 filings require you, within 30 days, to commence monthly payments vis a vis your proposed repayment plan. These payments are given to the trustee. The funds are held by the trustee and will not be dispersed to creditors until final approval of your proposed repayment plan. The trustee will continue to receive your monthly payments and will disperse same until your plan is completed. The trustee will keep a record of monies received/dispersed for the entire term of your repayment plan. At the end of the 3-5 year period the trustee will complete a final accounting/audit and submit a final report to the Court recommending a discharge order.

Bankruptcy law has provisions regarding how Chapter 7 and Chapter 13 trustees shall be paid for their services. Chapter 7 trustees first receive a $60 administrative case fee taken from petitioners’ filing fees. If there are no assets which can be sold to recoup money for creditors and/or there are no tax refunds, litigation monies, etc. to attach, then there will be no further compensation for the trustee. If assets are available for sale, the trustee receives a sliding scale commission on monies collected and dispersed to creditors. The scale is:

  • 25% of 1st $5,000 given to creditors
  • 10% of next $45,000
  • 5% of next $950,000
  • 3% of anything over $1,000,000

These are maximum amounts. The trustee files an application in bankruptcy court requesting payment. Creditors, etc. receive notice of the application. If no objections are filed, trustees can receive maximum allowable amounts.

Chapter 13 trustees are “standing trustees” which means that, unlike a Chapter 7 trustee, this is a full time job, so to speak. The compensation given to a Chapter 13 trustee is generated from the approved repayment plan. A court order requesting payment is not required. The compensation figure can vary but will be guided by the following:

  • 10% of the repayment plan is the maximum percentage that can be given as compensation
  • The Chapter 13 trustee’s yearly wage as a trustee cannot be more than a federal government employee at an Executive 5 level which is approximately $145,000
  • Chapter 13 trustees must file operating budgets (office expenses, employee salaries, etc.) with the Office of the U.S. Trustee. They are reviewed and costs/compensations will be set based upon same. The aforementioned 10% can subsequently be adjusted depending upon the number of Chapter 13 filings and can change during the 3-5 year life of the plan.
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